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Keppel Corp gets buys all around as multi-business strategy remains promising

Uma Devi
Uma Devi • 4 min read
Keppel Corp gets buys all around as multi-business strategy remains promising
With Temasek's move to increase its stake in Keppel proving to be promising, and a diversified business strategy, analysts say the conglomerate is poised for a rebound.
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SINGAPORE (Apr 30): As conglomerates continue to grapple with the effects of the Covid-19 outbreak, analysts are remaining bullish on Keppel Corp due to its diversified business strategy.

This comes despite the group reporting earnings of $160.5 million for 1QFY2020 ended March, denoting a 20.9% decline from earnings of $202.9 million a year ago. Keppel had attributed the decline to an absence of gain on divestment of a 70% interest in Dong Nai Waterfront City in Vietnam last year.

The bright spot in the group’s financial updates came from a 21.3% increase in revenue to $1.9 billion due to higher contributions from its offshore & marine (O&M) and local property trading projects, power and gas business segment, as well as the consolidation of M1.

See: Keppel Corp posts 20.9% fall in 1Q earnings to $160.5 mil, braces for 'difficult operating environment' ahead

Despite the seemingly dismal topline figures, analysts are unfazed about Keppel’s near term prospects. For one, the group’s core businesses in property investments and development, offshore marine (O&M), and infrastructure-based activities in Singapore and the region could well cushion it from severe adverse impacts.

“Keppel’s diversified businesses would allow it to weather the economic slowdown better,” says DBS Group Research analyst Ho Pei Hwa.

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In particular, Ho is banking on the group’s property segment to be boosted in 2QFY2020 amid completions of its properties in China, as well as Tianjin Eco-city land sales and divestment gains.

“[Tianjin Eco-city] was acquired in 2009 at less than one tenth of the current land price and yet to be reflected in our RNAV,” says Ho.

“In addition, the ongoing portfolio rebalancing exercise will unlock values of completed projects,” he adds.

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In October, Temasek Holdings made a partial offer through its wholly-owned subsidiary Kyanite Investment Holdings to acquire an additional 30.55% of shares in Keppel at $7.35 each. This would result in its stake being increased to 51%.

Apart from an increase in stake, Temasek also highlighted its intention to undertake a “comprehensive strategic review” of the group’s business segments.

See: Temasek moves to raise stake in Keppel Corp to 51% with partial offer at $7.35 per share

Some six months after the offer was made, market watchers opine that this move is “in the spotlight” as investors consider this a potential for unlocking value.

“Investor focus is likely to remain on Temasek’s offer, as the success of it can set in motion transformative initiatives in the industry,” say analysts at OCBC Investment Research.

The brokerage notes that Keppel is also currently finalising its Vision 2030 strategy, and has commenced a strategic review of its logistics business.

DBS’s Ho agrees, saying that the offer “should lend support to [Keppel’s] share price” by lowering the cost per share for shareholders by about 88 cents at the current share price.

For more stories about where money flows, click here for Capital Section

Looking ahead, RHB Group Research analyst Leng Seng Choon views the group’s O&M segment as one to watch despite its disappointing earnings in 1QFY2020. While crude oil prices continue to be a headwind, the brokerage notes that some 70% of the segment’s orderbook is contributed by the renewables and gas-related solutions.

CGS-CIMB is opting to remain “cautiously optimistic” on Keppel’s property segment despite 73% year-on-year decline in earnings contributions to $35 million. The group had also missed the brokerage’s forecasts of $88 million. However, analyst Lim Siew Khee identifies the “encouraging” sales in China.

“Its property sales in China have been encouraging with 330 units sold in 1Q20, of which more than 200 units were sold post Covid-19 lockdown in February to March,” says Lim.

“We believe Keppel could be a recovery story on the back of improving home purchase sentiment in China and Vietnam as Covid-19 lockdowns ease,” adds Lim. “Being a conglomerate also means Keppel has ample ammunition to gain from capital recycling/asset re-measurements exercises.”

DBS, OCBC and RHB are maintaining their “buy” calls on Keppel with respective target prices of $6.80, $7.16 and $7.40. CGS-CIMB is also reiterating its “add” call on the group with a target price of $7.48.

Shares in Keppel closed 13 cents higher, or 2.2% up, at $5.98 on Thursday. This translates to a price-to-earnings ratio of 14.1 times and a dividend yield of 3% for FY2020F according to DBS valuations.

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